January 8, 2013
Today's the day: Alcoa Inc. (AA) kicks off earnings season by announcing quarterly results after the closing bell. If analyst estimates hold true, it's going to be a battlefield, and there are going to be a lot of big names that will go down. Then again, the analyst community isn't always right, so we'll also likely see a number of companies trounce estimates.
Beating estimates is called an "Earnings Surprise." I measure these as a percentage, calculated as the difference between actual earnings and consensus estimates. If a stock beats Wall Street's earnings forecast by a significant amount, share prices can rally dramatically. This is why I closely monitor the market to find stocks that regularly post earnings surprises.
So before earnings kick off, let's take a look at five stocks that are no stranger to beating estimates by 10%, 20% or even 50% or more. You'll want to keep these stocks close by, because if history repeats itself, these five stocks could pop after they announce earnings in the coming weeks.
AOL Inc. (AOL) is due to report fourth-quarter earnings around January 30 Right now, analysts forecast 69.9% bottom-line growth. However, over the past four quarters we've seen AOL Inc. trump estimates by 43.8%, 214.3%, 10,070% (!) and 29.4% Because analysts have been hiking up their estimates over the past few months, I expect a repeat performance. This stock has improved remarkably in my Portfolio Grader system over the past 12 months; last February, AOL was a D-rated sell! While the company had struggled after Time Warner spun it off as a separate business, the company has been on a buying spree of other competitors and it is starting to gain momentum. AOL is an A-rated buy.
Cinemark Holdings Inc. (CNK), the owner of the popular movie theatre chain, has its next earnings announcement scheduled for late February. And shareholders can't wait to see how the company does. While analysts currently expect 69.6% earnings growth, Cinemark has posted double-digit earnings surprises for three out of the past four quarters The company has been breaking ground on a slew of new cinemas across in response to increased viewer attendance. CNK is a B-rated buy.
Footlocker Inc. (FL) is looking to cross the finish line strong this quarter. For its mid-February fourth-quarter earnings announcement, analysts predict 30.9% earnings growth. In the past three quarters, Footlocker has beaten the consensus estimate by at least 12.2%. Apparently Footlocker is excelling while competitors like Finish Line Inc. are flagging because the company already has a firm handhold in the fast-growing basketball shoes market. I have FL down at a B-rated buy as well.
PetSmart Inc. (PETM) has proven quarter after quarter that our love for our pets translates into some serious spending. Interestingly enough, the analyst community hasn't seemed to have gotten the message, as PetSmart Inc. has posted an average 14% earnings surprise over the past three quarters. So this quarter, I expect PetSmart will once again outperform the 33% consensus earnings estimate. With estimates that half of American pet owners bought holiday gifts for their pets this season, it should be a strong fourth quarter PETM is an A-rated buy.
AOL competitor Yahoo! Inc. (YHOO) is also headed towards an exciting earnings announcement after the close on January 28 That's because Yahoo has posted double-digit earnings surprises for the past three quarters—two which were over 40%! So Yahoo shouldn't have too much trouble beating the consensus estimate, which calls for a 16.7% jump in earnings. The fact is that Yahoo is in the middle of several exciting efforts to streamline its business—and the divestiture of much of its Alibaba Group stake certainly helped. YHOO is an A-rated buy.
On the flipside, these five companies have an abysmal track record when it comes to matching estimates, so you'll want to steer clear of these stocks and avoid getting burned this earnings season.
Avon Products Inc. (AVP) has managed to miss the consensus earnings estimate by at least 22% for three of the past four quarters! And it doesn't help that this quarter, analysts expect Avon will post a 30.8% drop in earnings compared with the same quarter last year. So I recommend that you sell your shares of AVP before it reports fourth-quarter earnings in mid-February.
Crocs Inc. (CROX) is starting to be an earnings season dud: Last quarter it missed estimates by 14%. This quarter, analysts forecast an 83.3% drop in earnings, and that estimate could very well go lower before Crocs' late-February announcement. After all, analysts have slashed their earnings by 90% over the past three months So make no mistake: CROX is a sell.
DuPont (DD) is a regular on my sell lists. That's because it has posted an earnings miss for the past three quarters and shareholder have more disappointment coming their way. While it seems like the consensus estimate couldn't get lower (a 74.3% drop in earnings), analysts have downwardly revised their consensus estimate by over 77% over the past quarter. DD is also a sell.
Tiffany & Co. (TIF) is expected to grow earnings by a little this quarter, but given its track record of earnings misses, I'm not holding my breath. Last quarter, the company missed estimates by 22%, continuing a long tradition of disappointing earnings. TIF is a sell.
The Wendy's Co. (WEN) reports earnings next Wednesday, so you'll need to act fast if you're a current shareholder. While earnings are expected to be flat this quarter, Wendy's has missed estimates by an average of 37% over the past three quarter. So I highly recommend that you sell WEN before earnings.